Do Mandatory Retirement Contributions Crowd Out Voluntary Contributions?

June 2020

Retirement plans differ in whether employee or employer contributions are mandated, leaving a critical role for voluntary contributions.


Economic theory predicts that required contributions will “crowd out” voluntary contributions by up to five percentage points (pp). To test the theory, this study analyzes how employees responded to a shift in required contribution rates at a large public university. Starting in 2010, the university’s defined contribution plan enacted two key changes: the employer contribution rate fell by 1.5 pp and a mandatory employee contribution rate of 5% was established. The results suggest evidence of crowd out, but not to the degree anticipated.

This study was presented at the June 25, 2020, TIAA Institute Fellows Symposium. To view additional research that was presented, go to the 2020 Fellows Symposium Overview.

Key Insights
There is a small and often statistically insignificant reduction of 3-6 pp in the share of employees who make any voluntary contributions to the DC plan.
The reduction is modest in comparison to the 50% of employees who contributed more than zero but less than 5% before the policy change.
Among those who continue to make voluntary contributions, such contributions dropped by about 2.25 pp.
The resulting crowd-out rate is only about 45%, falling well short of predicted crowd-out of up to 5 pp.

Using the university’s administrative records, the authors compared saving decisions of 2,867 new faculty hires over a 10-year period spanning five years before the change in contribution rates to five years after the change.